Investment Principles

You cannot expect a different result by doing the same thing as others. Yet, most investors continue to follow the crowd while still hoping to do better than the rest. The truth is, human brains are wired to follow the crowd and to ‘seek safety in numbers’.Herd instinct may have helped our ancestors survive the harsh environments, but today it is one of the worst things that an investor can do if they want to achieve above-market returns.

DALBAR’s research helps to put things into perspective: despite investing in the same equity market, the average investor achieved a return of only 7% over 30 years, versus the market’s 10%. That is why it is crucial for us to have an effective investment philosophy and a trackable, measurable process. We do this to help investors overcome their reactive impulse or cognitive bias. This is how we outperform over the full market cycle.

You cannot expect a different result by doing the same thing as others. Yet, most investors continue to follow the crowd while still hoping to do better than the rest. The truth is, human brains are wired to follow the crowd and to ‘seek safety in numbers’.

It takes more than good insights to get better returns. Investment managers who make the right calls often still do not make much of an impact on their performance. What’s the reason? 1. Restrictive investment mandates. 2. The fear of being seen as wrong when their calls are different from the mainstream. Studies show that funds that follow the market closely underperform over time. As the old saying goes: ‘Nobody gets fired for buying IBM’ . Today, with the ‘safe bet’ being a group of few stocks widely held in portfolios, the saying should be: ‘Nobody gets fired for buying FANG’.

Taking a different position is only the first step. The next step is to invest with conviction by allocating a meaningful position to make an impact.

We take big positions (up to 20%) when there is good opportunity – similar to how Warren Buffett or Howard Marks manage their portfolios. The confidence to be bold while being different comes from having a solid foundation. We focus on identifying opportunities with solid fundamentals and attractive valuations that presents a reasonable margin of safety, and must be confident about their long-term prospects – this combination offer investors a higher chance of achieving better returns with less risk of losing money.

It takes more than good insights to get better returns. Investment managers who make the right calls often still do not make much of an impact on their performance. What’s the reason?

Investing is not like running a business. Entrepreneurs like Elon Musk or Steve Jobs managed to achieve extraordinary feats by putting everything on the line. But the greatest investors who have amassed immense wealth possess a different skill: mastery in the art of managing losses, especially in the face of black swan events that can destroy investment portfolios. This is how Warren Buffett grew his net worth to more than $100 billion. He once famously said:

‘Rule number one: Never lose money. Rule number two: Never forget rule number one”.

Only fools believe they know everything. To manage the unknowns, we proactively implement effective risk management measures to prepare for the unexpected. By doing so, our investors can be at ease to stay invested across the market-cycle, and get a better chance of achieving long-term investment success.

Investing is not like running a business. Entrepreneurs like Elon Musk or Steve Jobs managed to achieve extraordinary feats by putting everything on the line. But the greatest investors who have amassed immense wealth possess a different skill:

“They’ve done well in the last three years” is probably one of the most popular reasons for many to invest in a fund. Yet, relying mainly on past performance often leads to performance chasing and the risk of ‘buying high, selling low.’ The great investor Joel Greenblatt, revealed some striking facts in the book ‘The Little Book That Beats the Market’:

“If you look at the top performers over the last decade, 97% of those top managers spent at least three years in the bottom half of performance. Almost half, 47%, spent at least three years in the bottom ten percent of performance. These are the ones who ended up with the best long-term record. Yet most people leave them – most people don’t stick around long enough. If an investment manager underperformed in the last six months, year, or two years, people chase performance and they take money away…and give it to someone else”

Likewise, the fact that Warren Buffett has experienced painful periods of underperformance (e.g. 1999, 2009, 2022) does not change the fact that he is one of the greatest investors of this century.

Clearly, a fund’s long-term returns goes beyond its recent performance. Everyone knows not to follow the crowd to chase performance, but it is hard to do emotionally. Our solution: focus on a manager’s Philosophy and Process, and tomorrow’s Performance will come.

“They’ve done well in the last three years” is probably one of the most popular reasons for many to invest in a fund. Yet, relying mainly on past performance often leads to performance chasing and the risk of ‘buying high, selling low.’

At the core of our belief lies a fundamental principal: only focus on opportunities that offer highly predictable outcomes. Predictable outcomes does not mean trying to predict interest rates, economic growth, or recessions. As alluring as predictions are to many investors, the harsh reality is there is no crystal ball. Instead, we strive to deliver what’s important for investors – a more predictable return over time. If we cannot reasonably understand how an investment will play out; we will not invest no matter how ‘attractive’ it may seem.

We can get predictable returns because there are some things that remain constant even as the world is constantly changing. This is why we dedicate ample time to analyze historical data to gain insights into how investment trends have behaved over time. With the four most dangerous words in investing being ‘this time is different’; we look for consistent patterns that can also take advantage of the tendency for human emotions to swing from ‘Euphoria to Depression’. This knowledge equips us to invest in the future with more predictable outcomes.

At the core of our belief lies a fundamental principal: only focus on opportunities that offer highly predictable outcomes. Predictable outcomes does not mean trying to predict interest rates, economic growth, or recessions.